Is finance really a winner’s game? History has proven it is. But in the movies, it’s always the cold-hearted and evil business people and their investors who inevitably end up losing.
I guess someone forgot to show the script to Australia’s finance industry because in the past two years shareholders in finance and banking stocks have been getting spoilt rotten. From tiny speculative tech/finance stocks right up to the Commonwealth Bank of Australia (ASX: CBA) – our country’s biggest financial institution – pockets have been getting lined with dividends and handsome capital gains.
However, with gains already made, is it too late to buy-in? Let’s take a look at some top performers and what they have to offer.
Australia and New Zealand Banking Group (ASX: ANZ) is the fastest growing big bank in Australia. For the most part, because it’s not focused on growing in Australia. Its Asian expansion named, The Super Regional Strategy, is now beginning to pay dividends. For the first quarter of the 2014 financial year the International and Institutional Business Banking division was led by the Global Markets business which delivered 53% of market income. Totalling just over $600 million in revenue. Whilst this is still a relatively small amount, the long-term upside of the strategy is looking brighter every quarter.
However with the domestic banks’ trading on expensive multiples and becoming less profitable with increased competition, now might not be the right time to buy-in. Instead investors are advised to hold-off until prices fall.
Back in November, I highlighted Challenger Ltd (ASX: CGF) as a stock overlooked by the market. At the time, funds under management (FUM) were booming and the annuities business was trucking along nicely. It provided a two-pronged growth hit for shareholders in the form of both a long and steady earnings profile (from baby boomers seeking annuities) and rapidly expanding earnings potential via the funds management business.
Despite rising around 72% in just one year, Challenger shares still trade on modest multiples and should reward shareholders in the long-term with potential for upside surprises. It remains a highly regulated business with plenty of cash in the bank and continues to boast both short and long-term growth prospects.
Further down the market food chain, we have both Mortgage Choice Limited (ASX: MOC) and Yellow Brick Road Holdings Ltd (ASX: YBR) (YBR). Both companies are busily pursuing organic growth strategies and offer similar products to one another. These two are currently experiencing macroeconomic tailwinds in the form of low interest rates and rising confidence.
At the company level, both offer robust balance sheets and expanding customer networks. However, at current prices I believe the results from YBR have been more impressive and I can see its share price growing more rapidly in the next five years. This is because it has a big cash balance, fast growing store count, will make its maiden profit in FY15, and Chairman Mark Bouris recently hinted at the possibility of acquisitions.
ANZ is at a crucial time in its history. A point where it could really differentiate itself from Australia’s other big banks, but is expensive like its peers. Challenger continues to be a long run delight and both Mortgage Choice and YBR are exciting growth prospects. Of the four, I own shares in Yellow Brick Road and believe it holds considerable long-term value for investors and would be my pick of the bunch. However it has a market capitalisation of only $100 million and its share price can be volatile, nevertheless I think the current prices are compelling.
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Motley Fool Contributor Owen Raszkiewicz owns shares in Yellow Brick Road.